Their murder campaign took them from the scenic shores of Lough Foyle in Co Donegal on the western seaboard of the Irish Republic and back across the border to their base in one of the most prosperous, staunchly loyalist towns in Northern Ireland.

Their targets included Sinn Fein councillors and suspected republican sympathisers, but in the main their victims were innocent Catholics in and around the Greater Lisburn area, a predominantly Protestant market town south of Belfast.

And all the time, from the late 1980s to the mid-1990s, one of the men sending out dedicated loyalist gunmen to hunt down and murder for the terrorist Ulster Defence Association was himself an intelligence agent for the British Army.

It has now emerged that another agent was working for Army intelligence at a high level inside the UDA at the same time as Brian Nelson - the spy who helped set up the murder of lawyer Pat Finucane.

The revelation that another agent operated for the Army's highly secretive Force Research Unit - a shadowy group of intelligence agents - inside the UDA while the terror group carried out sectarian murders will put further pressure on the Government to hold a public inquiry into the murky world of the security services' relationship with loyalist terrorism.

Finucane, a Belfast solicitor, was shot dead in front of his family in 1989 after Nelson, a former British soldier and FRU informer, passed on his personal details to the UDA. The FRU and elements of the now defunct Royal Ulster Constabulary stand accused of aiding loyalists in setting up republican and Catholic targets in Northern Ireland.

Specifically in the Finucane murder, former UDA terrorists have claimed that rogue police officers wanted the lawyer killed and did nothing to stop the assassination team carrying out the murder. So intense has the controversy been surrounding the FRU's activities in Greater Belfast during the early 1990s that the Army has tried to erase bad memories by giving it a bland new name: the Joint Services Group.

But a name change, as was the case with Windscale turning into Sellafield, or Long Kesh becoming the Maze prison, cannot wipe away the scandal that has stained the reputation of the Army and other branches of the security services in Ulster.

And now The Observer can reveal that the UDA's second-in-command in Lisburn was also an agent for the FRU in the early 1990s. This man has since fled Northern Ireland with the aid of the security forces who spirited him and his immediate family out of the Co Antrim town to a secret location in England in the mid-1990s.

He was a member of one of the UDA's most ruthless assassination squads, which between 1989 and 1993 murdered six Catholics in the Lisburn area. Such was the reputation of the UDA's Lisburn unit that some of its members were recruited to carry out a high-profile murder across the border in the Irish Republic. UDA killers from Lisburn were sent to kill Sinn Fein councillor Eddie Fullerton at his Donegal home on 25 May 1991.

This latest revelation is another indication of just how deeply penetrated the UDA was with both Army and police agents during the upsurge in loyalist violence of the early 1990s. Although The Observer has established the FRU agent's identity, he cannot be named for legal reasons.

The agent had been recruited into the UDA's assassination team in Lisburn by the late John McMichael, the organisation's 'Brigadier General' whom the IRA murdered in 1987. The UDA eventually unmasked the FRU's informant after he was spotted being escorted into Thiepval barracks at the edge of Lisburn. Thiepval is the British Army's headquarters in Northern Ireland and the nerve centre of the military's counterterrorist intelligence operations.

As second in command of the Lisburn UDA, the agent would have had access to information on planned killings and other terrorist activity in the town and beyond. Loyalist sources admit that the informant managed to thwart several attacks in the Greater Lisburn area by his contacts with FRU.

Their admission certainly bolsters claims by Army intelligence officers, including Nelson's former boss in the FRU, Brigadier Gordon Kerr, now Britain's defence attaché in China, that their agents actually prevented scores of loyalist murder bids. Kerr has always contended that Nelson actually saved the life of Sinn Fein President Gerry Adams by thwarting a limpet-mine attack on his car.

Meanwhile, Sir John Stevens, the senior police officer whose report into the collusion allegations is set to be published within the next few weeks, has refused to elaborate on why he changed his mind over the causes of a controversial fire at his former headquarters in Northern Ireland.

In January 1990, an office the current Metropolitan Commissioner was using as part of his investigation into allegations of collusion between the security forces and loyalist terrorists, was set on fire. A month later, Stevens released a statement firmly rejecting conspiracy theories relating to the blaze at Seapark, a Royal Ulster Constabulary base on the northern outskirts of Belfast.

Stevens said in February 1990: 'I am happy to state categorically that I am satisfied with the RUC investigation into the fire at the Seapark Office.

'Despite the most thorough tests, there is simply no evidence to suggest that the cause of the blaze was anything other than accidental.'

However, on the first half of a two-part Panorama investigation into collusion in Northern Ireland screened last Wednesday, Stevens was asked what caused the fire at Seapark. 'I strongly believe that it was deliberately set; it was not caused by a discarded cigarette,' he told the programme.

Asked why the Commissioner has now changed his mind about the origins of the fire - which at the time many in Northern Ireland believed was deliberately started to frustrate his inquiry - a spokesman for Stevens said: 'The Commissioner's comments regarding the fire were made at the time of the incident; however, further information has come to light and in view of this the Commissioner has made further comments.'

The Observer has also established that Panorama's chief source on the first programme, the self-confessed UDA terrorist Ken Barrett, was not the assassin who killed Finucane. According to senior loyalists, Barrett drove the car over to the lawyer's home off the Antrim Road in Belfast.

Barrett did burst into the Finucane home on 12 February 1989 but did not fire the fatal 14 shots that killed the solicitor in front of his wife and children. Barrett was filmed in secret by the Panorama team and claimed on camera that elements in the police wanted Finucane dead. He went on to claim that the security forces not only could have prevented the murder but also cleared a route for the killers on the night of the killing.

Whatever the substance to the allegations of highly placed informants directing UDA terrorism and members of the security forces aiding and abetting loyalist groups, there is one clear upshot from these controversies: Special Branch in Northern Ireland is to lose its primary role in controlling counter-terrorist intelligence.

Special Branch is to be merged with the CID in a new anti-crime unit within the Police Service of Northern Ireland. Overall control of intelligence material will in all likelihood be passed to MI5, with only a slimmed-down anti-terrorist unit operating inside the PSNI. No such reforms, however, are planned for the other agency alleged to have dabbled with loyalist terrorists in the early 1990s, the Army's highly secretive FRU.